Sunday, December 21, 2008

Our US car problem explained...

Megan McArdle has the best Auto Industry 101 post I have read.  If you have 10 minutes to spare, this lucid summary provides a good background for understanding what is happening.  Some key grafs (but please read the whole thing).
I will now attempt what I think is a fair rendition of Detroit's history over the last fifty years.    In the early 1950s, for various reasons Detroit developed a cozy three-way oligopoly.  The UAW developed a cozy monopoly on supplying labor service to that oligopoly.  In some ways, the UAW helped sustain that oligopoly.  If you're a big company whose quality suffers, you have problems.  But if you have a union making sure that labor quality cannot vary across the industry, you don't need to worry that your competitors will make a better car.  Detroit competed on styling and power, not reliability or price.
Detroit should have reacted, I'm sure, by making smaller cars.  But smaller cars were harder to make for Detroit.  Buyers thought of them as a non-premium product, which meant they wouldn't pay for the lucrative options packages.  And because they used fewer materials, the labor component became a relatively larger part of their cost.  Labor was where Detroit was least competitive.  According to the automotive analysts I've seen, Detroit still loses money on small cars like the Ford Focus, which are sold at a loss to help make Corporate Average Fuel Efficiency numbers come out.
But perhaps more importantly, Detroit turned from making money on cars to making money on financing.  Detroit didn't make a big profit by selling you a Ford Taurus.  It made money on financing your Ford Taurus; often, the car was sold at a loss in order to get the finance business.  The Big Three were banks manufacturing cars as a loss leader.
They also provide capital for selling cars.  Dealers have their own independent credit lines, which they use to buy cars, advertise, and so forth.  Dealers may be parasites on the body public 95% of the time, but right now, they're probably helping keep the Big Three out of bankruptcy by carrying unsold inventory, not pushing them deeper into it.
Spoiler: her conclusion is not a happy one.

Aside from being able to opine knowingly at holiday parties and farmer meetings, what do the auto industry death-throes mean to rural America? My guesses:
  1. Big pickups will have many fewer models and cost a fortune. 
  2. We're going to lose small dealers, like mine in Chrisman. We will travel farther for service and be more hung up when cars break down and the towing fee is $200.
  3. Rural living will lose some attraction.
  4.  I think we'll buy vehicles from now on based on three things: reliability, reliability, reliability
  5. In more of a reach, farms located near the fringes of metropolitan centers will be worth slightly more because of this access advantage.
  6. The loss of ad revenues from local dealers will be fatal to local papers and school scoreboards.
  7. An astonishing number of small farms supported by auto-industry wages (especially small parts suppliers) will be subsumed into larger operations.
While this sounds not so good, I now accept it is unlikely Detroit can survive.

[John's World: All Posts]

1 comment:

Ol James said...

Mz McArdle make some very good points, as do you. But let me play the conspiracy card here. The automakers do not satisfy the government and they take over,"nationalize",the industry. Then the government has to deal with the UAW. In the meantime, pressure from the public makes the government show where the $700 billion went. They have to "nationalize" the banks, wall street and all the other businesses they have bailed out.
The UAW sees an opportunity here and starts bringing into the fold other labor forces and begins a broad "unionizing" campaign. Now the government has to deal with the unions. And, you can bet your bottom dollar that the unions are NOT about to lose anything. Now the government is run by the unions, (just on a bigger scale).
With the government nationalizing so much and the unions getting stronger and bigger this may just lead to communism. Russia ran this way for decades. Whadda ya think??